In the Hot Seat: Exec Pay

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Three high-profile, high-earning executives who oversaw financial-services institutions that experienced large losses last year attempted to justify their pay packages at a congressional hearing Friday.

Former Merrill Lynch CEO E. Stanley O’Neal, ex-Citigroup CEO Charles Prince, and Countrywide Financial CEO Angelo Mozilo have spent the majority of their careers at companies that the House Committee on Oversight and Government Reform held up as being contributors to the mortgage-loan mess and ripple effect on the credit markets. But they claimed not to have been unduly compensated last year when their companies collectively suffered more than $20 billion in losses over two quarters.

Still, they admitted some culpability for not foreseeing the problems inherent in mortgage-backed securities. “As CEO, I was ultimately responsible for the protection of the company, including the risk models we used,” testified Prince. “While I was not the trader [of the securities] or the chief risk officer, I was the chief executive officer.”

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At issue was whether these executives were unfairly compensated in relation to shareholders’ interests amid the subprime-mortgage fallout. “How can executives do so well when companies are doing so poorly?” asked committee chairman Henry Waxman (D-Calif.). He cited the executives’ 2007 pay deals as reflecting a growing “disconnect” between Corporate America’s top business leaders and the rank-and-file workers they employ.

Last year, according to the committee, Mozilo was awarded more than $120 million in compensation and stock; O’Neal resigned from Merrill Lynch with a $161 million retirement package; and Prince received a $10 million bonus, $28 million in unvested stock and options, and $1.5 million in annual perquisites when he left Citigroup.

Merrill Lynch has since taken a $7.9 billion write-down relating to its losses in mortgage-backed securities and collateralized debt obligations, and Citigroup has recorded more than $20 billion in subprime-related losses. Countrywide’s stock took a nosedive in 2007, falling 80 percent from a five-year high in February, according to the committee.

The chairs of the Merrill Lynch and Citigroup compensation committees disputed the contention that the pay packages were excessive. Prince and O’Neal suffered losses along with their stockholders, as they had been required to hold on to 75 percent of any company stock they earned while employed. And the majority of O’Neal’s $161 million package was based on performance measures created before last year, said John Finnegan, who heads Merrill Lynch’s compensation committee.

More under fire from the Democrats on the committee was Mozilo, who sold almost $150 million of his company’s stock in the past year, according to the committee’s data; some after Countrywide initiated a $1.5 billion share-repurchase program. Waxman sarcastically praised Mozilo for his timing in selling his stock just as Countrywide reached its last high of 45 cents a share and questioned how such a move helped the firm’s shareholders.

Mozilo defended his actions, saying he began getting his personal finances ready for retirement in 2004 and was advised by financial advisers to begin cashing out over a long period of time. He testified that rather than take out all of the stock at once, he stayed invested in the company because he “wanted to stay aligned with shareholders.” He also defended the timing of the stock-repurchase plan relative to his own stock sale, saying, “There is absolutely no relationship between the buyback of stock and any sales of options — there’s no relationship whatsoever.”

The committee’s Republicans tried to poke a hole in the premise of Waxman’s hearing, suggesting the government shouldn’t intervene in executive pay packages and that the compensation under review at the hearing had little — if any — effect on the problems in the housing market. “This is a hearing in search of the bad guys, and I don’t see any bad guys,” said Darrel Issa (R-Calif.), who noted that the three executives oversaw successful companies during the majority of their tenures.

In a separate discussion before the executives’ testimony, Nell Minow, editor and co-founder of corporate-governance watchdog The Corporate Library, said lucrative pay packages can have merit — as long as they take into consideration shareholders’ interests. However, when a high salary does not match an executive’s poor performance, she said, “that undermines the credibility of the American capital markets.” Minow suggested that shareholders should be given the ability to cast nonbinding, advisory votes on pay packages and have more say in director elections.